Time Value of Money
"The money today is worth more than the money tomorrow."
How does the time value of money work?
Time value of money is an important term in finance. It largely depends on the time, rate of interest and the frequency of the investment. It is largely based on the fact that the money today is worth more than the same amount of money in the future as it can grow over time.
To understand the time value of money, let’s take a simple example. If you have two options -i. Take Rs.1000 today or ii. Take Rs.1000 after 1 year. What will you choose?
If you choose the first option of taking money today; then congratulations, you understand the time value of money. For most of us, taking money today rather than tomorrow makes sense. This is because, when you receive money today, you can increase its value by investing and earning interest on it rather than taking the same money in the future.
Let’s consider our example, where you will receive Rs.1000 today itself. In this case, you can put that money in the bank FD for one year at 6% interest. In this case, you will get Rs.1060 after one year, which means the value of your money has grown by Rs.60.
This makes time value of money an integral part of the investing world as it helps you understand the worth of your money in relation to time.
Frequency of Inflow
The impact of time value of money is higher when the investment is done frequently. When the cash inflow is at regular intervals, it acts as the booster to the initial amount as it helps in beating the market volatility. The amount either gets invested in the new opportunity or helps in increasing the position size of the existing holding.
Rate of Return
Time value of money greatly depends on the rate of return on investment. Higher the rate of return, higher will be the wealth generated in future. This is because when we invest for a longer period of time, we exponentially increase the impact of power of compounding. We think that the equity market is the only asset class which generates higher return on investment in the longer term.
Reinvestment
The main fundamental of time value of money is reinvesting the profit from the capital. This creates a snowball effect increasing the capital over time as the profits earned on initial capital also earn profits over time. This is the real cause of generation of wealth over the long term as neither investment nor its profit is withdrawn from the system.
The Brighter Mind Approach
We, at Brighter Mind, believe that time is more valuable in the investing world. The earlier we start investing the more earning potential it can possess. Hence we recommend to start investing at the earliest as the more delay in investing less will be the impact of time.
It is also important to start investing early because the value of money keeps changing over time. This is because as the investment earns interest over time, the inflation takes away some part of that interest causing the decrease in value of money.
Hence we continuously strive to fetch higher returns for the investors which can help them comfortably beat the inflation. Also, when these returns are generated without taking any higher risk, it becomes a win-win situation for our investors.
